Business groups attacked high street banks last night over their treatment of small companies and gave warning that a failure to pass on yesterday’s dramatic rate cut could exacerbate the economic downturn.

Banks have been increasing overdraft and loan rates for small businesses in recent months, as well as tightening their lending criteria, forcing many struggling enterprises into deeper difficulties. Although business groups welcomed the Bank of England’s move, they cautioned that it would have minimal impact on the floundering economy unless banks also cut their rates.

Stephen Alambritis, of the Federation of Small Business, said that the number of companies going to the wall would increase unless the cost of borrowing fell. “If banks don’t start passing rate cuts on, we could see 1,000 small business failures every week – similar levels to those seen in the last recession,” he said.

The CBI said this week that job losses would soar unless banks were more willing to lend to businesses. Small concerns employ more than 13 million people in Britain.

Phil Orford, chief executive of the Forum of Private Business (FPB), also gave warning that there would be a damaging effect on business confidence unless the banks took action. “The message from the banks will be that they are simply not prepared to lend under any circumstances. They need to use the guarantees on offer from the central bank, start lending to each other and get back to business.”

Adding to the calls for action, the Institute of Directors (IOD) cautioned that banks could ultimately harm their own businesses by failing to support small businesses during the economic downturn. Graeme Leach, chief economist and director of policy of the IOD, said: “Holding back rate cuts will weaken the economy, and this negative feedback will eventually hit the banks.”

Banks and building societies argue that despite the falling base rate, the interest they pay to borrow money via the wholesale markets is higher, so they are forced to charge customers a higher rate. Lenders that also rely on their own deposits to fund mortgages and other types of lending say that they have to pay out attractive savings rates to keep savers with the bank, which in turn prevents them from passing on all rate cuts. Fewer than half of lenders passed on October’s half-point rate cut to mortgage borrowers.

Phil Wrigley, executive chairman of New Look, the fashion chain, said: “The cut’s positive but the key is whether it gets through to the customer and when does it get passed through to businesses. Until that happens it’s like a blind man winking in a dark room – it makes no difference.”

Economists also said that if rates were not passed on to bank customers, the move could have an adverse effect. Martin Weale, of the National Institute of Economic and Social Research, said: “There is a very real concern that if there is a large cut, and then nothing happens, people will feel even more at sea than they do already.”

Banks and business groups have been called to a crunch meeting with Lord Mandelson, the Business Secretary, on Tuesday to thrash out an agreement on how to cope.

Economists said that the Bank’s move signalled that it was catching up with the dismal news from the coal-face of the economy after cutting rates only once since May this year.

Sushil Wadhwani, a former member of the Monetary Policy Committee (MPC), said: “Having been behind the curve for a year, the Bank is finally beginning to catch up.”

However, Sir Steve Robson, former second permanent secretary to the Treasury, said: “It looks like panic and that is never a good thing. There should be more modest cuts along with a fiscal stimulus of tax cuts for a limited period of time.”

But nearly all of the experts agreed that more rate cuts were in the pipeline. Dr Wadhwani said he expected rates to fall as low as 2 per cent by January at the latest. Professor Goodhart, another former MPC member, said that the Bank may wait until next year.

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